Oil has been in a strong freefall over the last few days of futures trade. This has helped boost stocks, with the Dow regaining nearly 500 points in two days. The Dow bounce occurred after a drop below 11,000 early in the week.

Interestingly, it is fresh economic concerns in the US that have helped drive down expectations for energy demand. The weak economy and weak dollar have been credited with much of the contribution to the growth in oil and gas over the last several months. However, renewed economic concerns have prompted some economists to predict aggressively strong reductions in fossil fuel and other energy demands.

Light sweet crude oil futures fell below $130 on Thursday (July 17). This was the first time in over a month that oil had been below this mark. The fall is been furious as oil is now over 10 per cent lower than it was to start the week on Monday. The 3-day drop of over $16 helped lead to Thursday’s close of $129.29. The fall has been fast, but consistent over the week. Today’s dip of $5.31 was consistent with Tuesday and Wednesday slides.

Along with expectations for lowered demand in the developed world, new data shows a higher level of oil inventories than had been anticipated. This higher supply, lower demand speculation contributed to the big drop. A lack of significant political and military turmoil in oil-producing nations helped as well.

Analysts seem mixed as to what the week’s trade means for the near and long-term trends in oil prices. Some believe oil speculators are simply creating a necessary correction following a spike that has developed too fast. Much of the recent run up has been driven by political tension and heightened global stability concerns, as opposed to more substantive market factors. This tends to produce a speculating environment where a forceful reversal can develop fast.

If this week is simply a sharp correction in the recent trend, it makes sense that oil would resume its upward move soon. Often, strong changes in direction lead to modest moves back in the trend direction. Of course, some camps think the powerful reversal is a confirmation that the oil spike has run out of steam. Several leading analysts have suggested all signals have been pointing to limited upward potential for oil.

Certainly American consumers are desperately hoping for an end to rising oil, assuming it contributes to lower fuel and natural gas prices. Unfortunately, retail gas remained steady at $4.114 Thursday, according to the Energy Information Administration and AAA. Gas has been largely unaffected as of yet with the oil drop. However, there is often a delay in pricing between oil trade dips and prices at the pump. If oil continues to drop Friday, it is hard to imagine retail gas prices would not follow suit.

Diesel prices actually ticked to a new record of $4.845. The high diesel has really put a damper on some businesses that rely heavily on transport of goods. Many have raised shipping prices and are working to consolidate truck routes. Some trucking companies have narrowed their areas of operation.

The dollar reversed up a bit Thursday, in synch with the oil fall. The dollar climbed back over 106 yen after falling below 105 earlier this week. It also pushed back against the Euro which had set a new all-time high against the dollar earlier in the week. One dollar currently nets .6315 Euros.

Market Recap

Stocks surged Wednesday in a rebound from its recent drop. The Dow jumped 276 points as the NASDAQ and S&P were up 69 and 30 points. Despite growing concerns over the credit market, comment from Fed Chief Bernanke that Fannie Mae and Freddie Mac would not fail put investors at ease. Oil dipped to $135. Another big day for stock Thursday as the rebound continued. The Dow put up another 207. The NASDAQ and S&P popped up by 27 and 14 points. Another big drop in oil, below $130, was the major equities catalyst. Google and Merrill Lynch both posted disappointing second quarter results.

Neil Kokemuller
Thursday, July 17, 2008
10:10 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

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